Should you make 20% down payment for your home

BANGALORE: Pragnya and Atul Abhayankar are couple based in Mumbai. Having reached middle management positions in their respective corporate careers and lived on rent for five years, they have managed to save enough to buy their first home. But even after having done extensive homework on the property and the home loans that they are eligible for, they are still unable to arrive at a decision.They are unsure about whether or not to put down 20 per cent of the total value of the property as down payment for their first home.

Pragnya and Atul are not unjustified. One does want to take all the correct decisions so that there are no regrets later. Here are the pros and cons of putting down 20 per cent of the purchase price that will help the likes of Atul and Pragnya in making an informed decision.

The pros

Attractive rates from the lender’s end

Putting down 20 per cent of the purchase price, will put you in good stead with your bank. Lenders today typically agree to disburse loans to those who are agreeable to putting in anything between 10-15 per cent of the property price as a down payment, therefore those opting to putting in a higher amount will be eligible to get attractive rates of interest. Further the process of disbursement will be faster as you have already put in your margin money for the property.

Lower EMIs

The more amount of down payment you make on your mortgage, the lower will be your monthly outgo as EMI. You will be then left with a higher cash flow to make other investments to secure your financial future. If you continue to make timely repayments throughout the tenure of your mortgage, you will also get a higher credit score in the Cibil report. This is turn will reflect positively when you need to take some other emergency loan.

The cons

A major blow to your savings

If Pragnya and Atul decide to put in 20 per cent of the property price as down payment, they will part with a huge amount. This means that you must be prepared to take a major hit to your savings. Making that kind of commitment is a decision that cannot be arrived overnight, so take your time.

Your future choices get limited

Putting down a huge chunk of your savings as a down payment also means that you will have limited flexibility with regards to your cash reserve, You may find yourself in a bind if you need to buy a new car or are faced with some medical emergency.

Diversification dilemma

If a lion share of your savings get locked up as a down payment for your first home, you will be left with only a single investment as you will have little or no cash left in hand to diversify your investments.

Buying your first home is a decision that is bound to be fraught with a range of emotions. Considering these pros and cons of putting down 20 per cent as down payment will help you arrive at a prudent decision.

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